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What Records You Should Keep

December 20, 2012

With the approaching end-of-year, now is a good time to get rid of excess clutter and unneeded files.  Here is a guide that lists what tax records you should keep and how long you shouold keep them.  When organizing your files, please remember these are general rules concerning your records.


Income Tax Returns and Related Items: Keep all federal and state income tax returns and supporting documents (i.e. items confirming your income and/or deductions) for a minimum of six years after the return’s filing date.  Why? The IRS can assess additional taxes within three years of its filing date, but has up to six years in which to make a tax assessment if the IRS determines that a substantial amount of income was omitted from the return.


Also, the tax returns and back-up income data are a “road map” to facilitate settling your affairs or to assist someone handling your affairs.  This will provide a very good idea of what assets you have and where they are.  Put each year’s return and data in an envelope marked with the year on it, and the date (six years later) you should dispose of it.


Gift Tax Returns: If you ever made gifts where you filed federal gift tax returns, those returns along with the back-up should be retained forever.  These returns might be needed to be filed with estate tax returns.


Mailing Receipts: If you mail your return by certified mail, or by an express carrier, keep the receipt with your copy of the tax return.  Make sure the receipt shows the date the return was mailed.  If your return is filed electronically, keep a copy of the electronic filing confirmation.  In the event the return is misplaced or lost by the tax authority, this documentation will save you from late filing or payment penalties.


Residential Property Records: The tax laws allow part of the gain to be tax-free when you sell your residence.  However, you still might have to substantiate the amount of the gain.  Because of this, you need to keep closing statements from all home purchases and sales and records of amounts spent for home improvements.


Stock and Bond Records: Keep records of your investment (e.g., stocks, mutual funds and bonds) purchases.  Besides providing you with a date for determining the type of gain – long-term versus short-term –these records establish your basis in the investment and help to compute the gain/loss when you sell them.  In addition, keep records that show a return of capital dividends and complete back-up of DRIP (dividend reinvestment plans) additions which establish your basis in those shares.


Tax tip: If you’ve owned DRIP or other stock for many years and do not have the back-up information and want to dispose of those stocks, consider using them instead of cash to make your charitable contribution.  You don’t need your basis; you will get a deduction for the full value of the stock; and do not have to recognize the capital gain on those shares.


Gifts or inherited assets: Keep all records showing your basis of inherited assets, or assets received by a gift.  These will be needed if you sell the assets, and might be needed if you are involved in a marital separation.


Rental Real Estate Records: For any rental real estate or depreciable business property that you own, keep records of the property’s cost, the purchase date, the method used to calculate depreciation and a schedule of all depreciation claimed on the property.  Maintain these records until you sell or dispose of the property.  Once you sell the property, keep these records with the tax return on which you report the sale.  You need to keep current leases handy, and I would also retain the immediate preceding lease for that property in case weird claims are made against you and you would need to refer to the lease.


Partnership and Business Agreements: You should retain all partnership, member, corporate organizational, buy/sell or cross purchase agreements as long as you have an interest in any currently owned business interest or entity.  You should also retain all basis calculations.


Employment Contracts: Any employment contracts, stock purchase, option, restricted stock or similar agreements should be retained as long as you are employed by the company and then at least through the date of expiration of any of the commitments should they go past your employment.  It is also important to have these handy for your heirs if you die and there are limited exercise periods that survive you.


Personal Records: Keep a permanent file of personal records –such as marriage license, divorce agreements, prenuptial agreements, change of name papers, military discharge, family tree and birth certificates. Also retain receipts for purchases of art, collectibles, jewelry and the like since they can provide a basis for determining your tax liability when you dispose of the property.  They can also assist in insurance claims should they be lost, stolen or destroyed.


Other Records: There are other situations where you will benefit by keeping records.  For example, if you have made nondeductible contributions to an IRA, maintaining records of these contributions will facilitate proving, and reducing, your tax liability when funds are withdrawn from the IRA.  You should also retain back-up of Roth IRA conversions that were taxed.  For this you can keep the tax return for the years the tax was paid.


Legal Judgments and Loan Satisfactions: I recommend keeping these forever.  This is irrefutable proof that you do not owe those debts or obligations.


Insurance Policies: This listing refers to old documents.  All current information should be kept in an easy to access place.  This includes every type of insurance policy, and I would retain the previous two years’ policies so that you would have a comparison if you need to make a claim, and to check rates and coverage.


General Rule: When in doubt about a document, keep it.


Reprinted from Getting Your Affairs in Order by Edward Mendlowitz, CPA ©2012 Edward Mendlowitz, CPA.  Available for sale at and in print and e-book editions.

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